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Online Platforms Play Matchmaker For Private Equity Issuers, Investors


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They’re like the of finance—social media-like platforms connecting entrepreneurs with high-net-worth investors eager for alternatives to traditional markets.

Online platforms are providing the private equity world with the matchmaking they need to pair growing businesses with advisors and investors.

“Until deals were listed on online platforms, the only way you could find a private investment was through someone who knew about the deal,” says Kelly Rodriques, president and CEO of San Francisco-based PENSCO Trust. “It’s about creating a destination that provides a more efficient discovery of what’s available to me.”

While larger businesses can issue bonds and small businesses can tale advantage of equity crowdfunding made possible by the JOBS Act of 2012, middle-market businesses often struggle to raise capital. 

Growing companies can now issue private equity offerings entirely online using platforms like PENSCO’s Alt-Nav deal funding technology. Meanwhile, an expanded field of high-net-worth investors get streamlined access to the investment opportunities, says Fred Bryant, co-founder of Richmond, Va.-based Wealthforge.

“Public markets are a gamble, but it’s not a zero-sum game, which opens a lot of people’s eyes to the possibilities,” Bryant says. “With private investments they’re investing in real growth, not in generic equities where they’re taking a bet on the future health of a company or a fund.”

WealthForge is a broker-dealer platform using technology to ease the private investment process. Its digital platform launched in 2015.

WealthForge now counts its transactions in the hundreds and attracts thousands of investors, growing to become the fourth most active broker-dealer in U.S. private placements in 2015, Bryant says,

Another online private equity platform, iCapital, was launched last year with similar aims.

“We wanted to make the process easier for folks who were investing,” says Lawrence Calcano, managing partner at New York-based iCapital Networks. “It was also quite clear that high-net-worth investors had limited access to what has historically been an institutional investment product.”

Brokers offering private equity investment have had a web presence for more than a decade, but it wasn’t until 2013, when the SEC allowed issuers to market directly to accredited investors, that the investments were offered online.

A recent study of 443 RIAs sponsored by iCapital found that only one-third provided access to private equity opportunities for their wealthy clients over the last five years. Nearly 70 percent of those who do not offer private equity acknowledged seeing client interest in the area, but finding those opportunities remains a challenge: 80 percent of the respondents reported using friends and family as sources for investment tips.

For some advisors, geography is an issue — while private equity opportunities may be relatively common in major metropolitan areas, in rural locales they may be more difficult to find.

“The wealth market is so highly fragmented, with wealthy people in all pockets of the world, that general partners can’t reach them all,” Calcano says. “We give them a more significant reach into the wealth community.”

After finding an opportunity, private placements require a higher level of research and due diligence, to the extent that many investors—and advisors—lack the time, resources and expertise to do it themselves, he said.

iCapital says it allows investors to use various research tools to investigate funds on their own time, but also provides access to a lineup of funds it has previously vetted.

“Research for investors is kind of step two, with access and visibility being step one,” Calcano says. “When someone is specifically interested in a fund that we might have on the menu, all the information is interlinked through iCapital.”

In iCapital’s survey, advisors cited lack of transparency, lack of liquidity and high minimums as leading reasons for not offering clients access to private equity opportunities.

All three firms claim that their technology makes the private equity investment process more efficient and transparent.

“Clearly, people have taken to trading stocks online and are comfortable automating that process,” Rodriques says. “With platforms like Alt-Nav, you can make investments around the clock.”

For example, WealthForge’s “Invest Button” gives accredited investors one-click access to private placement opportunities and saves advisors the challenge of processing the transaction and managing the risk within a private equity portfolio. Issuers and intermediaries can include WealthForge’s Invest Button on any e-mail or website related to their projects.

By eliminating the need for investors and advisors to provide duplicate personal and deal information across several documents, the platforms allow advisors and investors to efficiently implement private placements within their portfolios.

Alt-Nav, launched in 2015, concentrates on helping investors employ private placements within their IRAs, says Rodriques, tapping into a $7 trillion market. “Those are huge numbers, and a lot of that money is seeking returns,” he says.

Capital raisers enter investment documents within Alt-Nav, then investors can easily review and approve them through a one-click process. Investors can then fund their account and electronically complete authorizations pre-populated with personal and deal information.

iCapital offers similar functionality, says Calcano.

“When the investors decide they want to invest, all of that process, including the completion of documentation and signatures, is done electronically,” Calcano says. “Then we connect into custodial platforms where investors can see those statements post-investment. That compares to a highly manual process historically, where an advisor might be faxing documents all over the place—and a high percentage of time they would be returned incorrectly filled out.”

The automation also assists brokers and asset managers in reporting the net asset value of their private equity funds more frequently, says Calcano.

The three platforms claim to help issuers and advisors perform the back-office activities needed to complete private equity transactions, including investor accreditation and regulatory filings.

As the regulatory environment around investing and financial planning changes, advisors will be held to a higher standard of due diligence around private placement investments, making the efficiencies created by digital platforms more valuable, says Rodriques.

“Unless a client is an expert themselves in this space, you’re going to see an increasing responsibility for those who can act as fiduciaries and do the due diligence in private equity,” Rodriques says. “For the major RIA networks and the wirehouses, this is already what they do. Others likely don’t know the asset class.”

The online communities growing around private equity platforms may also lead to a secondary market for the investments, says Rodriques, creating a greater level of liquidity and possibly a new real-time method of valuation.

As automated processes become more widely adopted, the cost of accessing private equity opportunities is likely to drop.

Private placements are already moving towards lower financial barriers to access. iCapital’s Private Access Fund Program offers qualified investors access to private equity at $100,000 minimums, where previously such investments were often only accessible at minimums between $1 million and $5 million.

Yet Rodrigues, Bryant and Calcano emphasized that these investments are not appropriate for most of the mass affluent. As their platforms gain users, the growth stems from bringing private equity, once the realm of institutions and a relatively small group of ultra-high-net-worth investment mavens, to more individual investors.

“What’s interesting about WealthForge and iCapital is that they’re educating the world about private equity,” Rodrigues says. “We’re not sure who’s going to win the platform origination battle, but they’re definitely playing a role in the growth.”


To read this article on Financial Advisor magazine, click here.